With natural disasters being on the rise across developing states in Asia, the implementation of parametric insurance and reinsurance appears to be a natural fit for the region, according to Tom Johansmeyer, Global Head of Index Classes, Inver Re.
A recent whitepaper authored by Johansmeyer explains that while traditional insurance usually requires historical data around penetration, premium spend and losses, parametric re/insurance however, does not have to deal with these constraints.
Unlike traditional insurance, parametric covers rely on an external source of data to indicate the magnitude of a triggering event.
As a result, parametric re/insurance could be an effective gamechanger within a region that witnesses so many natural disasters, like Asia.
The whitepaper highlights how generally in Asia – excluding Japan, South Korea, and other wealthier states in the region – data shows that 1,267 natural catastrophe events took place during the ten-year period ending in 2023, which impacted nearly a billion people.
At the same time, climate change appears to intensify this risk and amplify the impact in the years ahead, ultimately exposing some of the most vulnerable people in the world to increased, more frequent and more powerful natural disaster events.
The surge in natural disaster activity also brings forward further costs for remediation, a major issue that threatens to extend the suffering associated with disasters, and straining the economies least able to bear further expense.
Johansmeyer notes that the costs of managing natural catastrophes are already high, and according to estimates in natural disaster database EM-DAT, the past decade has cost the Global South states in Asia more than US$400 billion, adjusted for inflation.
Therefore, if you take the 2014-2022 average and use that for 2023, then the ten-year total stretches above $460 billion, a incredibly high figure.
Going back to parametric re/insurance, the whitepaper showcases how Inver Re, previously has helped its clients in Türkiye secure parametric reinsurance protection for earthquake risk.
Another key aspect of parametric re/insurance which is highlighted, is that parametric covers require a magnitude measure, which protects capital providers from such issues as political risk, moral hazard and adverse selection – all of which have been identified as causes for concern with regard to insurance in developing markets.
As well as this, Johansmeyer notes that parametric risks are relatively easy to model and understand, which ultimately makes this approach easier for reinsures to accept than traditional re/insurance.
“It’s not just the flow of capital that’s fast with parametric re/insurance. Access to protection is faster as well. Unlike
traditional re/insurance, the fact that parametrics are easier to model can accelerate decision-making and reinsurers’ appetite for diversifying risks – especially in Asia – provides further incentive to support the region. Investing in the Global South improves the productivity of global reinsurer capital, contributes to sustainable profitable growth and provides a foundation for future market expansion,” the whitepaper reads.
